Question

A taxpayer uses an allowance method​ (i.e., aging​ method) of calculating bad debt expense for purposes of the​ business' financial statements. For income tax​ purposes, she will also use the allowance method to calculate the bad debt deduction.

True

False

Beth and Bob are married entrepreneurs. Beth has a start −up sole proprietorship in which she works long hours. This year the business generated​ $500,000 of revenues and​ $800,000 of deductible business expenses. Bob is a partner in a new​ partnership, also working long hours. His share of the partnership loss for the year is​ $275,000. Fortunately, they both have trust funds so they are receiving​ $700,000 of taxable interest income and dividends in 2019. Due to this​ year's results, Beth and Bob will have an NOL carryover of

A.​$0.

B.​$65,000.

C.​$325,000.

D.​$575,000.

Answer 1

1) Bad Debts: Bad Debts are theb asnticipated uncollectibles from the customers.BadDebts is created as a provision for the doubtful debts.BadDebts are the expenses of the business. BadDebts can be recognised by using 2 different methods a)  Direct Write oof Method or b) Allowance Method or Aging method.

Direct Write of Method : This method write off's the Bad Debts to expense as and when it becomes uncollectible from the customer. In USA this method used for Income Tax purposes.

Allowance Method or Aging method: Under this method the company anticipates the badDebts based on the sales made and on aging basis and creates provisions for the doubtful debts in order to avoid the over statement of accounts. Thus the revenues and expenses are matched in the same financial year.

Direct Write off method fails to satisfy this matching principle and shows overstatement of accounts and so is not used for the preperation of financial accounts which requires matching Principle. Hence Allowance Method is used for preperation of financial statements as it satisfies matching Principle.

In the given statement it is said that, A taxpayer uses an allowance method​ (i.e., aging​ method) of calculating bad debt expense for purposes of the​ business' financial statements. For income tax​ purposes, she will also use the allowance method to calculate the bad debt deduction.

The statement is false as Allowance method is used for accounting Financial Statement purposes and Direct Write off method is used for Income Tax purpose.

2) As per IRS NOL Non- operating losses can be carryforward with an amount of 80% of the taxable income for an unlimited period. For calculating the NOL the aggregate losses should be deducted frrom the aggregate income.

And the deduction will be subject to excess loss from all activities that are greater than the threshold limit i.e $250,000 for single filers and $500,000 for married joint filers

Given Beth and Bob are married enterpreneurs. Beth has $500,000 revenues and $ 800,000 revenues. Bob has loss of $275,000 this year. In 2019 they had interest and dividend income of $700,000.

Here I assumed this year refersto 2018 and the next year is 2019. It is assumed they file joint returns

Calculation Of NOL:

NOL = Total losses - Aggregate Revenues

= $800,000 - $275,000

= $575,000 - $500,000 (threshold limit for joiint filers)

NOL = $75000

Calculation of NOL carryforward: According to IRS it can be carryforward to the next year with an amount of 80% of Taxable income

In the given case the taxable income is $700,000

$700,000 * 80% = $560,000

So they can carryforward the loss upto $ 560,000

But the NOL is only $75,000 it is limited to $75,000 only

The correct option is not given in the question.